What’s driving current mortgage rates?
Owing to markets being closed for the Independence Day holiday, this report will not appear tomorrow. As predicted, average mortgage rates fell a little yesterday. It was the fourth in a series of small up-and-down movements that have recently kept rates within a narrow range. Luckily, that range is exceptionally low.
On Monday, we warned this could be a volatile week for markets. It still might turn out that way. Friday is the most likely day for sharp movements because that sees this month’s publication of highly important official employment data. But today also brought a number of economic reports, including two that could help predict Friday’s big one. See below for deails.
The data below the table are again indicative of mortgage rates moving downward today. However, as always, events might yet overtake that prediction.
|Conventional 30 yr Fixed||3.875||3.875||-0.06%|
|Conventional 15 yr Fixed||3.5||3.5||Unchanged|
|Conventional 5 yr ARM||4||4.552||Unchanged|
|30 year fixed FHA||3.313||4.297||Unchanged|
|15 year fixed FHA||3.313||4.261||-0.06%|
|5 year ARM FHA||3.375||4.942||-0.02%|
|30 year fixed VA||3.5||3.671||Unchanged|
|15 year fixed VA||3.438||3.748||Unchanged|
|5 year ARM VA||3.563||4.23||+0.02%|
|Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.|
Financial data affecting today’s mortgage rates
First thing this morning, markets looked set to deliver mortgage rates that are lower today. By approaching 10:00 a.m. (ET), the data, compared with this time on Friday, were:
- Major stock indexes were all a little higher soon after opening (bad for mortgage rates). When investors are buying shares they’re often selling bonds, which pushes prices of Treasuries down and increases yields and mortgage rates. The opposite happens on days when indexes fall. See below for a detailed explanation
- Gold prices rose to $1,416 an ounce, up from $1,397. (Good for mortgage rates.) In general, it’s better for rates when gold rises, and worse when gold falls. Gold tends to rise when investors worry about the economy. And worried investors tend to push rates lower)
- Oil prices were again lower at $57 a barrel, down from $58 (good for mortgage rates, because energy prices play a large role in creating inflation)
- The yield on 10-year Treasuries fell to 1.95% from 2.01%. (good for borrowers). More than any other market, mortgage rates tend to follow these particular Treasury yields
- CNNMoney’s Fear & Greed Index held steady at 60 out of a possible 100. (Neutral for borrowers.) “Greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite. So lower readings are better than higher ones
It might be a good day for mortgage rates.
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Today’s drivers of change
The US-China trade dispute is still very much alive in spite of recent events. On Saturday, Presidents Donald Trump and Xi Jinping met in Osaka, Japan during the G20 summit. And, as a result, bilateral trade talks have begun again and America will not implement planned new tariffs. But existing tariffs (and resentments) remain in place.
You might have expected markets to be pleased by the news, which would normally have seen mortgage rates rise sharply on Monday. However, that wasn’t the reaction. Why? Well, some remain skeptical about how likely a final agreement is. On Monday morning, The Financial Times ran the headline, “G20 relief but experts say ‘ceasefire’ might be temporary.” It went on, “Global economy likely to slow further despite truce between US and China.”
US vs. EU
Meanwhile, the possibility of a second front in the trade wars remains real. And there are increasing rumblings of possible escalations in the US-European Union (EU) trade dispute. Also on Monday, The Wall Street Journal carried the headline, “U.S. Proposes More European Tariffs Pending Airbus Case.” But that case isn’t as clear cut as you may think.
Airbus is a European airplane manufacturer that competes with Boeing. And you certainly can argue (as the US has for 15 years) that it receives governmental subsidies that give it an unfair competitive edge. Trouble is, the EU has argued for 15 years that Boeing’s governmental subsidies have the same result. As CNN reported yesterday, “The World Trade Organization has handed down favorable rulings to both sides since then , underscoring the complexity of the dispute.”
The EU is the biggest trading bloc in the world and an all-out trade war would be a clash of Titans that could cause real harm to the global economy — as well as the economies of both participants.
How disputes hurt
Markets hate trade disputes because they introduce uncertainty, dampen trade, slow global growth and are disruptive to established supply chains. The President is confident that analysis is wrong and that America will come out a winner. However, some fear a trade war — possibly on two fronts — might be a drag on the global economy that hits America especially hard. And that fear, in turn, is likely to exert long-term downward pressure on mortgage rates. That’s not to say they won’t sometimes move up in response to other factors. But, absent a resolution, such trade wars may well see the current downward trend in mortgage rates continuing.
Are markets bottoming out?
Since the middle of last November, the graph of average mortgage rates shows them falling with amazing consistency. Only occasionally and relatively briefly have they risen.
Some experts are now warning that they’re unlikely to go much lower — at least, absent something disastrous happening that pushes them beyond established ranges. Such bad news remains a possibility. Currently, there are tensions in the Middle East that could quickly turn into a shooting war involving the United States. Trade disputes might become yet more widespread and toxic, ultimately triggering a global recession. And, of course, events may quickly arise that are currently on nobody’s radar.
But, without such an external stimulus, those experts reckon rates are unlikely to fall much further. And, of course, there’s scope for good economic news that could see them rise, possibly sharply. Not everyone agrees with this analysis: Read Could we see 2% mortgage rates before this is all over?
Meanwhile, the deals that are available for you to lock in are now excellent by all but the most extreme standards. That’s why we still suggest locking your rate if you’re less than 30 days from closing. In our assessment, the potential gains you stand to make by floating are outweighed by the possible losses. But, as we say below on a daily basis, “Only you can decide on the level of risk with which you’re personally comfortable.”
Treasuries and mortgage rates
We liked a Mortgage News Daily simile so much we stole it. Mortgage rates are like dogs while yields on 10-year Treasury bonds are like their owners. Mostly, mortgage rates trot happily along on their leashes at their human’s heels. But occasionally they run ahead, dragging the owner along. And at other times they sit stubbornly and have to be dragged along.
Recently, they’ve been sitting a lot. If they’d been keeping up with those Treasury yields, rates would be even lower than they currently are. Why? Apparently, investors are concerned they’re not being rewarded sufficiently for the extra risk they shoulder when they buy mortgage-backed securities rather than Treasury bonds. And some are worried about the possibility of the government reforming Fannie Mae and Freddie Mac.
Those Treasury yields are one of the main indicators we use to make predictions about where rates will head. And, with that tool less reliable than usual, we sometimes struggle to get those predictions right. Until the relationship between rates and yields gets back in synch, you should bear that in mind.
Rate lock recommendation
Trends are impossible to discern from just a few days’ changes. So don’t read too much into short-term fluctuations. Frustrating though it is, there really is no way of knowing immediately what movements over a brief period mean in their wider context.
Even when one’s discernable, trends in markets never last forever. And, even within a long-term one, there will be ups and downs. Eventually, at some point, enough investors decide to cut losses or take profits to form a critical mass. And then they’ll buy or sell in ways that end that trend. That’s going to happen with mortgage rates. Nobody knows when or how sharply a trend will reverse. But it will. That might not be wildly helpful but you need to bear it in mind. Floating always comes with some risk.
Short- and long-term differences
Of course, it’s possible the Federal Reserve’s doveish March policy statement on rates, which seems to have been largely confirmed in mid-June, has established a long-term downward trend. But you can still expect to see rises and falls (such as those over the last several weeks) within it as other risk factors emerge and recede. And, depending on how near you are to your closing date, you may not have time to ride out any increases.
Experts differ over what may come next. And so much is unpredictable that your gut feel may have roughly the same chance of being proved right as their more informed views. Just don’t forget that you’re gambling with the mortgage rate you’re probably going to be paying for a very long time.
We suggest that you lock if you’re less than 30 days from closing. Of course, financially conservative borrowers might want to lock immediately, almost regardless of when they’re due to close. After all, current mortgage rates remain exceptionally low and a great deal is assured. On the other hand, risk takers might prefer to bide their time and take a chance on further falls. Only you can decide on the level of risk with which you’re personally comfortable.
If you are still floating, do remain vigilant right up until you lock. Continue to watch key markets and news cycles closely. In particular, look out for stories that might affect the performance of the American economy. As a very general rule, good news tends to push mortgage rates up, while bad drags them down.
When to lock anyway
You may wish to lock your loan anyway if you are buying a home and have a higher debt-to-income ratio than most. Indeed, you should be more inclined to lock because any rises in rates could kill your mortgage approval. If you’re refinancing, that’s less critical and you may be able to gamble and float.
If your closing is weeks or months away, the decision to lock or float becomes complicated. Obviously, if you know rates are rising, you want to lock in as soon as possible. However, the longer your lock, the higher your upfront costs. On the flip side, if a higher rate would wipe out your mortgage approval, you’ll probably want to lock in even if it costs more.
If you’re still floating, stay in close contact with your lender, and keep an eye on markets. I recommend:
- LOCK if closing in 7 days
- LOCK if closing in 15 days
- LOCK if closing in 30 days
- FLOAT if closing in 45 days
- FLOAT if closing in 60 days
Most of the economic reports scheduled this week are second- or third-tier ones that usually trouble markets only if they contain something shocking. However, Friday’s official employment situation report for June may be different. In that, even small variations between forecasts and actual figures sometimes spark movements in key markets. So strap yourself in for that one.
This morning’s employment data, which comprise a private report from ADP and weekly official numbers, are less authoritative and informative than Friday’s big one. So markets often barely notice them. But they’re sometimes seen as predictors of what will appear in the official report and occasionally make waves. So you can’t ignore them. The weekly figures were close to forecasts while the ADP report was much better than the one for May. However, May was a statistical outlyer.
But be prepared for some counterintuitive thinking. Good employment data are welcome news for the economy. So you’d normally expect mortgage rates to rise in response. But investors are very keen to see the Federal Reserve cut rates soon. And good employment figures might delay that. So the good news sometimes magically transforms into bad news.
Friday may be a particularly risky day. But any day can carry risk. Because any news story that can affect the American or global economies has the potential to move markets — and mortgage rates.
Markets tend to price in analysts’ consensus forecasts (below, we mostly use those reported by MarketWatch, Moody’s Analytics or Bain Mortgage) in advance of the publication of reports. So it’s usually the difference between the actual reported numbers and the forecast that has the greatest effect. That means even an extreme difference between actuals for the previous reporting period and this one can have little immediate impact, providing that difference is expected and has been factored in ahead. Although there are exceptions, you can usually expect downward pressure on mortgage rates from worse-than-expected figures and upward on better ones. However, for most reports, much of the time, that pressure may be imperceptible or barely perceptible.
- Monday: Institute of Sales Management ISM manufacturing index for June (actual +51.7%; forecast +51.3%) plus May construction spending (actual -0.8%; forecast +0.3%)
- Tuesday: June motor vehicle sales (forecast 17.0 million; previously in May 17.4 million) These figures emerge through the day as manufacturers release them.
- Wednesday: June ADP employment data (actual 102,000 new jobs; no forecast); weekly jobless claims (actual 221,000 new claims; forecast 220,000 new claims); May trade deficit (actual -$55.5 billion; forecast -$54.38 billion); June ISM nonmanufacturing index (actual 55.1%; forecast 55.9%); May factory orders (actual –0.7%; forecast -0.8%)
- Thursday: Markets closed for Independence Day (and therefore this article will not be published that morning)
- Friday: June employment situation report, which includes nonfarm payrolls (forecast +170,000 new jobs); unemployment rate (forecast unchanged at 3.6%); and average hourly earnings (forecast +0.3%)
Friday makes this an important week for economic reporting.
What causes rates to rise and fall?
Mortgage interest rates depend a great deal on the expectations of investors. Good economic news tends to be bad for interest rates because an active economy raises concerns about inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields (another way of saying interest rates) to increase.
For example, suppose that two years ago, you bought a $1,000 bond paying 5% interest ($50) each year. (This is called its “coupon rate” or “par rate” because you paid $1,000 for a $1,000 bond, and because its interest rate equals the rate stated on the bond — in this case, 5%).
- Your interest rate: $50 annual interest / $1,000 = 5.0%
When rates fall
That’s a pretty good rate today, so lots of investors want to buy it from you. You can sell your $1,000 bond for $1,200. The buyer gets the same $50 a year in interest that you were getting. It’s still 5% of the $1,000 coupon. However, because he paid more for the bond, his return is lower.
- Your buyer’s interest rate: $50 annual interest / $1,200 = 4.2%
The buyer gets an interest rate, or yield, of only 4.2%. And that’s why, when demand for bonds increases and bond prices go up, interest rates go down.
When rates rise
However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up.
Imagine that you have your $1,000 bond, but you can’t sell it for $1,000 because unemployment has dropped and stock prices are soaring. You end up getting $700. The buyer gets the same $50 a year in interest, but the yield looks like this:
- $50 annual interest / $700 = 7.1%
The buyer’s interest rate is now slightly more than 7%. Interest rates and yields are not mysterious. You calculate them with simple math.
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Mortgage rate methodology
The Mortgage Reports receives rates based on selected criteria from multiple lending partners each day. We arrive at an average rate and APR for each loan type to display in our chart. Because we average an array of rates, it gives you a better idea of what you might find in the marketplace. Furthermore, we average rates for the same loan types. For example, FHA fixed with FHA fixed. The end result is a good snapshot of daily rates and how they change over time.